Energy Future Holdings, formerly TXU Energy, is based in Dallas, Texas, and is the largest energy generator in the state. It came into being when Kohlberg Kravis Roberts & Co. (KKR) and Texas Pacific Group (TPG) bought TXU out for $45 billion, the largest leveraged buyout in history, and took it private. Shareholders received $69.25 per share, a 25 percent premium. GS Capital Partners, Lehman Brothers, Citigroup (C), Morgan Stanley were equity investors in the deal. Buffett bought $2 billion worth of bonds.
The investment met many of Buffett�� criteria for stock picking and business buying. At the time, the company served 2.1 million customers, it was simple and understandable, it had been producing the same product since 1882 and it produced a product that people could not live without. It was also profitable, with operating revenues that had increased substantially ��from $106 million to $151 million ��from 2004 to 2006.
However, TXU did not have a particularly wide competitive advantage in the deregulated Texas energy market. It also produced nuclear, coal and natural gas power, and ultimately, Buffett said, it was the plummeting of volatile natural gas prices that derailed the investment.
TXU explained how energy prices correlate to gas prices in its 2006 10-K: ��as-fueled generation is the predominant supply resource in the ERCOT [Electric Reliability Council of Texas] region in terms of both the installed capacity and electricity generation, accounting for approximately 75% of the capacity and 50% of the energy produced in the ERCOT region. As a result, natural gas-fueled pl! ant operators are the marginal suppliers in ERCOT, and wholesale electricity prices are highly correlated to natural gas prices.
By mid- 2006, electricity prices had risen more than 35 percent, largely as a result of skyrocketing natural gas prices. But by late 2010, the price of natural gas plunged, making it difficult for Energy Future Holdings to meet its debt payments. Moody�� Investor Service described the company at that time as having a ��ery weak financial profile, untenable capital structure, questionable long-term business plan and material operating headwinds.��br>
Buffett�� stepping out of his usual bounds cost him greatly. He wrote down the investment by $1 billion in 2010, and an additional $390 million in 2011. He carries the bonds now at their market value of $878 million, and could lose the entire investment if natural gas prices do not increase.
Buffett made another energy investing mistake with ConocoPhillips (COP), which actually resulted in a greater loss than Energy Future Holdings ��an estimated more than $3 billion.
Buffett began buying COP stock in 2005 at near $60. Then, in 2008, he poured an additional $5 billion into the position, when the stock reached its all-time high in the $90s. Shortly after that purchase, the price of oil plunged, cutting the price of COP shares approximately in half.
The 2009 Berkshire investor letter also records Buffett�� admission: �� told you in an earlier part of this report that last year I made a major mistake of commission (and maybe more; this one sticks out). Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible ti! ming of m! y purchase has cost Berkshire several billion dollars.��
The price has never again reached the level of his 2008 purchases, but he has been selling as it has recovered. It has reached a 52-week high of $81.80.
His investment in PetroChina (PTR) was more successful than either of his two losses in Energy Future Holdings or ConocoPhillips, though he said he still thought he sold too soon.
Berkshire bought 1.3 percent of PetroChina for $488 million, which valued the company at about $37 billion, when he believed it was worth about $100 billion. In 2002, the stock sold near $20. Two factors, Buffett said in his 2007 investor letter, increased its value, the increased price of oil, and its management�� great job in building oil and gas reserves. Oil prices also played in his favor this time. It had gone up from $30 to $75 per barrel.
He sold the stock from $160 to $200 per share. This gave him a profit of about $3.5 billion on a $500 million investment. But unfortunately, the stock still had farther to go. By 2007 it had rocked to a high near $255.
On his PetroChina investment, Buffett emphasized that price was the primary factor that got him interested. �� sit there in my office and I read an annual report and it described a very good company. It told about the oil reserves, told about the refining, told about the chemicals, told about everything else, and I sat there and thought to myself, ��his company�� worth about $100 billion.��Now I didn�� look at the price first, I look at the business first. Because if I look at the price first I get influenced by that, so I look at the company first, I try to value it, and then I look at the price and if the price is way less than what I just valued it at, I�� going to buy it,��he said on a television interview after he sold his stake.
Though there were many different factors involved in these investments, price played an important role in whether they were successful or not, showing how important not! overpayi! ng is even for Warren Buffett.
See Warren Buffett�� portfolio here and also check out the Undervalued Stocks, Top Growth Companies, and High Yield stocks of Warren Buffett.
Top 5 Undervalued Companies To Buy For 2014: Schlumberger N.V.(SLB)
Schlumberger Limited, together with its subsidiaries, supplies technology, integrated project management, and information solutions to the oil and gas exploration and production industries worldwide. The company?s Oilfield Services segment provides exploration and production services; wireline technology that offers open-hole and cased-hole services; supplies engineering support, directional-drilling, measurement-while-drilling, and logging-while-drilling services; and testing services. This segment also offers well services; supplies well completion services and equipment; artificial lift; data and consulting services; geo services; and information solutions, such as consulting, software, information management system, and IT infrastructure services that support oil and gas industry. Its WesternGeco segment provides reservoir imaging, monitoring, and development services; and operates data processing centers and multiclient seismic library. This segment also offers variou s services include 3D and time-lapse (4D) seismic surveys to multi-component surveys for delineating prospects and reservoir management. The company?s M-I SWACO segment supplies drilling fluid systems to improve drilling performance; fluid systems and specialty tools to optimize wellbore productivity; production technology solutions to maximize production rates; and environmental solutions that manages waste volumes generated in drilling and production operations. Its Smith Oilfield segment designs, manufactures, and markets drill bits and borehole enlargement tools; and supplies drilling tools and services, tubular, completion services, and other related downhole solutions. The company?s Distribution segment markets pipes, valves, and fittings, as well as mill, safety, and other maintenance products. This segment also provides warehouse management, vendor integration, and inventory management services. Schlumberger Limited was founded in 1927 and is based in Houston, Texas.
Advisors' Opinion:- [By Rebecca Lipman]
Together with its subsidiaries, supplies technology, integrated project management, and information solutions to the oil and gas exploration and production industries worldwide. Market cap of $91.49B. EPS growth (5-year CAGR) at 24%. According to Morgan Stanley: "Thanks to an estimated $1 billion investment per year in R&D, Schlumberger has what we consider the most advanced technology portfolio in the industry."
- [By Kathy Kristof]
Headquarters: Houston
52-Week High: $79.38
52-Week Low: $56.86
Annual Sales: $39.5 bill.
Projected Earnings Growth: 18% annually over the next five years
Energy-services giant Schlumberger is the prototypical multinational. The company derives roughly 85% of its revenues from overseas, including developing markets in Africa, Brazil and Asia.
With particular expertise in deep-water drilling, Schlumberger is well-positioned to compete in a world where oil is harder to find, says Argus Research analyst Philip Weiss. Admittedly, oil exploration is a cyclical business, driven largely by crude prices. And weak prices for natural gas have hit the company’s stock, Weiss says. But the price of natural gas has little to do with Schlumberger’s profits, so Weiss just sees this as an opportunity to get the shares at a more reasonable price. - [By Robert Holmes]
Schlumberger has the most potential upside of any stock in this group of 50 that also makes the firm's Best Ideas list. Analyst Ole Slorer says Schlumberger has "what we consider the most advanced technology portfolio in the industry."
"Its fundamentals are impressive, with what we think are some of the best field personnel, a pristine service and performance reputation, and leading market share in most of its product lines," Slorer writes.
Though Slorer's price target is 42% above current levels, his most bullish scenario for Schlumberger over the next year would see shares climb a whopping 116%. On the downside, his most bearish scenario for the company would see shares slide 38% over the next 12 months.
Top 5 Undervalued Companies To Buy For 2014: Tupperware Corporation(TUP)
Tupperware Brands Corporation operates as a direct seller of various products across a range of brands and categories through an independent sales force. The company engages in the manufacture and sale of kitchen and home products, and beauty and personal care products. It offers preparation, storage, and serving solutions for the kitchen and home, as well as kitchen cookware and tools, children?s educational toys, microwave products, and gifts under the Tupperware brand name primarily in Europe, Africa, the Middle East, the Asia Pacific, and North America. The company provides beauty and personal care products, which include skin care products, cosmetics, bath and body care, toiletries, fragrances, nutritional products, apparel, and related products principally in Mexico, South Africa, the Philippines, Australia, and Uruguay. It offers beauty and personal care products under the Armand Dupree, Avroy Shlain, BeautiControl, Fuller, NaturCare, Nutrimetics, Nuvo, and Swissgar de brand names. The company sells its Tupperware products directly to distributors, directors, managers, and dealers; and beauty products primarily through consultants and directors. As of December 26, 2009, the Tupperware distribution system had approximately 1,800 distributors, 61,300 managers, and 1.3 million dealers; and the sales force representing the Beauty businesses approximately 1.1 million. The company was formerly known as Tupperware Corporation and changed its name to Tupperware Brands Corporation in December 2005. The company was founded in 1996 and is headquartered in Orlando, Florida.
Advisors' Opinion:- [By Sam Collins]
Household name Tupperware Brands Corp. (NYSE:TUP) is a global direct seller of products with multiple brands through an independent sales force of 2.4 million people. Its product line focuses on kitchen storage and serving solutions, as well as personal-care products. Over 60% of sales in 2011 are expected to come from Europe and Asia, and the stock has appeal as an emerging markets story.
S&P estimates that 2011 earnings will increase to $4.54 versus $3.53 in 2010, and it increased its rating to a “five-star strong buy” with a recently revised 12-month target of $81, up from $73. The 2005 purchase of Sara Lee’s (NYSE:SLE) direct-sales business, which has a high growth rate, should be a long-term benefit. TUP’s annual dividend yield is 1.92%.
Technically TUP had a pullback following a new high at over $70 and is currently oversold. Buy TUP at the current market price with a trading target of $70, but longer term a much higher target will likely be attained.
5 Best Insurance Stocks To Watch Right Now: Dollar Tree Inc.(DLTR)
Dollar Tree, Inc. operates discount variety stores in the United States and Canada. Its stores offer merchandise primarily at the fixed price of $1.00. The company operates its stores under the names of Dollar Tree, Deal$, Dollar Tree Deal$, Dollar Giant, and Dollar Bills. Its stores offer consumable merchandise, including candy and food, and health and beauty care, as well as household consumables, such as paper, plastics, household chemicals, in select stores, and frozen and refrigerated food; variety merchandise, which includes toys, durable housewares, gifts, party goods, greeting cards, softlines, and other items; and seasonal goods, such as Easter, Halloween, and Christmas merchandise. As of April 30, 2011, it operated 4,089 stores in 48 states and the District of Columbia, as well as 88 stores in Canada. The company was founded in 1986 and is based in Chesapeake, Virginia.
Advisors' Opinion:- [By Sam Collins]
Dollar Tree (NASDAQ:DLTR) is a leading operator of discount variety stores. The stock has hugged its 50-day moving average since mid-February. But a recent minor revision of earnings for this year by several analysts and the recent market sell-off have resulted in a fall from its high of the year at over $70 to under $66. However, Goldman Sachs (NYSE:GS) increased its price target to $73 from $69.
Technically DLTR is oversold, according to MACD. A break below its 50-day moving average could result in a pullback to $64, but positions could be taken at the current market price. The trading target for DLTR is $72.
Top 5 Undervalued Companies To Buy For 2014: Caterpillar Inc.(CAT)
Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. It operates through three lines of businesses: Machinery, Engines, and Financial Products. The Machinery business offers construction, mining, and forestry machinery, including track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, skid steer loaders, underground mining equipment, tunnel boring equipment, and related parts. It also manufactures diesel-electric locomotives; and manufactures and services rail-related products and logistics services for other companies. The Engines business provides diesel, heavy fuel, and natural gas reciprocating engines for Caterpillar machinery, electric power generation systems, marine, petrol eum, construction, industrial, agricultural, and other applications. It offers industrial turbines and turbine-related services for oil and gas, and power generation applications. This business also remanufactures Caterpillar engines, machines, and engine components; and offers remanufacturing services for other companies. The Financial Products business provides retail and wholesale financing alternatives for Caterpillar machinery and engines, solar gas turbines, and other equipment and marine vessels, as well as offers loans and various forms of insurance to customers and dealers. It also offers financing for vehicles, power generation facilities, and marine vessels. The company markets its products directly, as well as through its distribution centers, dealers, and distributors. It was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. Caterpillar Inc. was founded in 1925 and is headquartered in Peoria, Illinois.
Advisors' Opinion:- [By Ben Levisohn]
For one day at least, this CAT is not a dog.
Caterpillar (CAT) has gained 2% to $86.22 today, its largest gain since in a month and the largest gain among the Dow components. The machinery manufacturer has dropped 11% during the past six months, however, as a slowdown in China and cost-cutting at mining companies have hit its shares.
Bloomberg
Susquehanna’s Ted Grace offers reasons for optimism, even as he lowers his 12-month price target to $97 from $104:
CAT remains Positive rated with 15% upside to our $97 price target and upside-downside of 1.2-to-1 (which, like most of our machinery names, is admittedly shy of the 2-to-1 or better ratio we prefer). Despite our 2014-15 EPS being ~6% below consensus, we view our updated estimates as closer to buyside expectations while noting that consensus appears to embed a low tax rate that explains over half of the variance. While there remains plenty of uncertainty on 2014/15, particularly in mining, we believe CAT shares currently discount reasonable top-line expectations while recent meetings with mgmt suggest potential for structural cost savings that could drive better than expected margins/ incrementals. While difficult to identify discernible catalysts, if CAT’s framework for flat-to-better RI revenue growth in 2014 proves correct (admittedly not assumed in our estimates), this would almost certainly debunk the core of the bear thesis and be meaningfully positive for shares.
Investors waiting for the stock to actually, you know, rise can take comfort in Caterpillar’s $2.40 dividend per share and its more than $3 per share in buybacks in 2013, Grace says.
Caterpillar’s 2% gain has trumped the Dow Jones Industrial Average’s 0.04% rise, and United Technology’s (UTX) 0.1% drop, while competitor Deere (DE) has gained 1.9% to $83.22.
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